How Legal is Bitcoin Remittance?

In February 2015, I wrote an article Coins.ph offers remittances to Philippines using Coinbase. Illegally? The end result of the article was receiving approximately 54+ comments out of which 50 or so were downright abusive. Hate mail followed. I almost debated if publishing this article was going to be worth it. After much thought I have decided to go ahead with it without citing any names. Draw your own conclusions.

Bitcoin Remittances: Legal or Illegal?

Over the past couple of months, a lot many Bitcoin Remittance (Rebittance) companies have sprouted up (a curated list of all bitcoin remittance companies can be found here). Licensed MTOs (Money Transfer Operators) are crying foul. Why? Because the legality and licensure of these Rebittance companies comes into question.

Buying & Selling of Bitcoins is okay (unless you’re Bangladesh which has outright banned the trade of Bitcoins). Now most MTOs don’t have a problem with that (and presumably, neither do the regulators), but when Bitcoin startups enter the domain of remittance, the waters get murky! Real quick!

Personally, I believe in a free system, yet this is not meant to be a contradictory statement, the law is the law. If money-transfer services requires a license, then where exactly do Bitcoin Remittance companies stand? Are they exempt? Are they legal? or are they operating illegally?

I posed the question to the regulators of five countries, and their answers are as follows:

Philippines (Bitcoin is not regulated, however, money transfer is)

Kenya (Bitcoin is not defined, money transfer is regulated)

India (Bitcoin is not defined, money transfer is regulated)

Argentina (Bitcoin is not defined, money transfer is regulated)

Mexico (Bitcoin is not defined, money transfer is regulated)

What the regulators are clearing citing that if a bitcoin company engages in the activities that are similar to that of a money transfer service, the operation requires a money transfer license. This is pretty much the standard answer of almost every regulator you ask of in the developing world.

Wallet providers cite that it is the user that is circumventing the system by using it for remittances, whilst others, clearly position themselves as entities that are engaged in Bitcoin transfers.

The Grey Area

If a licensed MTO in the United States does a pure Bitcoin-to-Bitcoin remittance to say Kenya, is this legal? The law can be murky here. According to my interaction with the Kenyan Central Bank, the answer was that the Kenyan Central Bank has decided not to interfere as yet into regulating bitcoins. However, they were concerned with the unlicensed companies who were engaged in the value-transfer into Kenya.

Startups in Kenya argue that Bitcoin is not regulated hence, they are exempt from obtaining a money transmitter license (equivalent) in Kenya. The regulators see it differently, and I quote:

“if the value transfer is in Bitcoins or Fiat, it does not matter. If the company is engaged what we deem to be money transfer (i.e. remittances) the Kenya Money Exchange licensing would apply to them”

Likewise, in the United States if a company from say Philippines is providing a system that upon review mimics a money transfer operation, and they allow US clients to be on-boarded, then this company (in the Philippines) is deemed to be a money services businesses in the eyes of FinCEN. Hence it needs to have Money Transmitter Licenses to be able to on-board US customers. In addition to this, registration with FinCEN is mandatory.

Merely saying that your system is being abused or misused for remittances is not good enough. The federal regulator has the view point that if your website is shown to say 20 people and after review by them, these 20 people are asked what does the website do and if they reply “money transfer” then you’re in trouble.

These grey issues are of grave concerns to the regulators in the US, in the terminating countries and the investors.

Do the same regulations hold true if Bitcoin is used for value-transfer between two licensed entities? The answer is, it depends.

If the value transfer is being done using Bitcoin payment rails, where fiat is injected into the sending side and fiat is ejected on the receiving side, then this method could be legal provided Bitcoin is defined as a legal entity in the recipient country as well not placing a mandatory requirement of funds to in-flow into the country.

If Bitcoin is not a legal entity in the recipient country, or is undefined, then depending on the foreign exchange rules, the transaction would most likelybe deemed illegal. Why? Because recipient countries want to see a journal entry of wealth moving into their country, as opposed to a net-off payment method. The value transfer (done using Bitcoins) can very well be recycled and exported out of the country without any capital flow control mechanisms.

India, Pakistan, Bangladesh, Vietnam, Nepal, Nigeria, Morocco, Thailand, etc. all have laws which cite that for a remittance to be classified as such, foreign exchange must come into the country and then must be surrendered for local currency equivalent. This is where Bitcoins break the rule. They do not represent a foreign-exchange in-ward flow in the recipient country. At least not yet, in the traditional sense.

In other countries, methods of value-transfers are defined. Gold, Silver, specific currencies, specific payment instruments, etc. when imported into the country and cashed out in local currency equivalent, would then officially represent a remittance transaction.

If the recipient country doesn’t care about in-flow of foreign exchange, then you could use pigeons for all they care to conduct the transaction.

Compliant But Unlicensed

I got the opportunity to view two investor presentations by two leading bitcoin remittance companies that were presented as recently as November and December 2014.

I can sum it up very eloquently: Marketing Bullshit!

There is so much misrepresentation of the facts and opinions that it almost made me laugh. Ignorance of the law amongst the investors is one prime reasons companies get funded. Words are twisted with double meanings (if not more). It almost reminds me of this image below:

One common argument you hear is how they are compliant with all the rules and regulation (just failing to mention, they may be compliant, but still unlicensed). However, it does raise one very important question. If an startup is compliant with all the rules and regulation and does not have a license, does it matter?

From a transaction point of view, the answer is No! It does not matter. All the data points collected, the checks and balances done are the same and yield the same transaction parameters. The data does not change if the entity is licensed or not. So, does it really matter?

Needless to say, the answer lies with the regulator. What is of interest is if such grey transaction could spell trouble down the line or not, both for the startup, its investors and the transaction partners who may be licensed in one geography.

That’s a great question, do the digital coins actually have a value transfer geographically. The 3rd and last article in this series (hopefully), addresses just this topic. How (wrongfully) government are trying to squeeze the flow / control of bitcoins and why they will fail. But a great point raised by you nonetheless.

There are two jurisdictions for each remittance transfer — the sender’s jurisdiction and the recipient’s. The recipient’s jurisdiction receives a net inflow of funds from the remittance.

Remittances received improve the jurisdiction’s financial development and are believed to reduce poverty ( http://www.migrationpolicy.org/article/understanding-importance-remittances ). Therefore governments have very good reason to accommodate these inflows. For instance, the regulators in these jurisdictions aren’t chasing after the hawala industry nor the other firms that are essentially a form of remittance in in the way they serve the diaspora (e.g., MakaMikes.co.ke ).

That’s why they probably won’t be coming down on Bitcoin remittance firms any time soon either. If the regulators do change their stance the rebittance firms can get licensed and adjust to remain compliant as well.

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About Faisal Khan

Faisal Khan is a banking/payments consultant specializing in cross-border payments and is a digital money evangelist. He is the co-host of Around The Coin, a weekly podcast on Payments & Fintech with over 18,000+ listeners. Mr. Khan is a talent scout for Series A & B financing for various fintech VCs/funds. He is also a frequent contributor to popular Q&A site Quora where he has been a Top Writer 6 consecutive years.